Waived sanctions on Russian pipeline are more about China than Russia

The White House’s decision to waive sanctions against the owner of the controversial Nord Stream 2 gas pipeline and that company’s top executives sparked strong bipartisan disapproval in Congress and concerns from allies in Central and Eastern Europe about the U.S. commitment to energy security of the region.

President Biden and his foreign policy team appear to be balancing two core realities: one, the pipeline is already almost complete and two, the U.S. needs Germany and other key European partners to help present a unified front against China’s global challenge.

Approximately 120 firms spread across a dozen European countries are working or have sought to work on the pipeline. Yet the U.S. has only sanctioned a narrow subset of entities tied to Russia, including pipeline laying vessels Fortuna and Akademik Cherskiy and their owners, KVT-Rus and Samara Heat and Energy Property Fund. This strongly suggests that sanctions imposed to date on pipeline-related actors are largely symbolic.

History is instructive for understanding the Biden administration’s course of action.

France and Germany actively sought to import Soviet gas during the Cold War. In fact, they wanted the gas badly enough to risk a serious rupture in relations with Washington. West German Chancellor Helmut Schmidt’s words in July 1982 still ring relevant: “The pipeline will be built and the British, the French, the Germans, and other Europeans will stick to the agreement which their firms have been making with the Soviets.”

The balance of interests in 2021 is even more skewed.

Nord Stream 2 is a core strategic priority for Russia but also an important objective for Germany and other Western European countries for whom it can provide reliable, lower-carbon energy supplies. But the pipeline is only a tertiary strategic priority for the United States. Instead, Washington is deepening its ongoing “pivot” toward Asia.

China concerns now pervade even interactions between the U.S and core European security partners. Consider the February 2021 NATO Defense Ministerial meeting where “an increasingly aggressive China” was a key agenda item and after which U.S. Defense Secretary Lloyd Austin characterized China as “our primary pacing challenge.” 

Against this backdrop, it is increasingly plausible to see America’s Nord Stream 2 sanctions restraint as a tactical trade off by a White House seeking greater trans-Atlantic unity to confront the strategic global economic and political challenges by China. A shift on Nord Stream 2 would coincide well with rising European apprehensions about China’s economic, climate, political, and military practices that now increasingly dovetail with America’s longer-standing concerns regarding many of those same areas of interest.

Europe is acutely concerned with Chinese firms competing in critical markets against European counterparts and in the pursuit of global technological supremacy, often using mercantilist and state-sponsored assistance. And while China talks green, it burns more than 4 billion tons per year of coal, threatening European climate initiatives and European firms’ market position vis-à-vis China-based competitors supported by cheap but carbon dioxide-intensive energy.

EU institutions also chafe at China’s progressive intensification to manipulate thought and opinion on key value issues. Just this month, the European Parliament overwhelmingly voted not to ratify the comprehensive agreement on investment between the EU and China until Beijing lifts the sanctions it imposed on prominent European Parliamentarians and other officials and scholars over their opposition to the cultural genocide campaign in Xinjiang. China also seeks to manipulate European politics, including by cultivating leaders in democratic backsliders such as Hungary and Serbia.

Western Europeans, in particular, see the challenge from Russia as much more manageable. This opens the door for constructing a three-dimensional modus vivendi. The U.S. accommodates Western European desires to source gas directly from Russia, helps to facilitate gas supply resilience policies, and more deeply integrates European powers in the nascent coalition of democracies that the Biden administration hopes to rally against China’s authoritarian threat. 

Russian gas is primarily problematic if Russian energy company Gazprom has a monopoly position exploitable for either commercial or geopolitical purposes. Western Europe is already well-protected, with competitive gas markets that are highly liquid, very price-conscious and basically source-blind. In contrast, Eastern and Central Europe have, broadly speaking, not yet achieved this eminently desirable end-state, though significant steps toward supply diversification have been taken. Herein lies a unique opportunity for the U.S. to advance two policy initiatives to minimize potentially deleterious strategic effects of Nord Stream 2 while building a more united front in Europe vis-à-vis China.

First, Washington should intensify its diplomatic support for rigorous EU application of the third energy package to Nord Stream 2. The package was amended by the European Parliament in 2019 and covers all pipelines to and from non-EU countries, including Nord Stream 2. It formally imposes requirements to protect market integrity and EU consumers — for instance, third party access as well as, probably most problematic in the case of Nord Stream 2 — the separation of gas ownership and gas transmission from each other, or unbundling. 

Second, the U.S. should lead an effort to financially support key gas infrastructure projects in Europe — a policy we dub “gas geoeconomics.” Doing so could support and accelerate the construction of vital pipeline interconnections and liquefied natural gas import options throughout the region, allowing Central and Eastern European countries to import gas from a greater range of sources and foster deeper market liberalization. Gas geoeconomics could thus blunt Russia’s ability to weaponize gas exports and enhance key European partners’ resilience against Russian energy coercion for decades to come. 

While Russia still matters for U.S. foreign policy, it is secondary to China. Wise policy would recognize this reality — and would leverage the growing availability of internationally traded gas supplies as a foundation for market-based policies that help deter Russian energy coercion and underpin affordable supplies for European consumers. Forward-looking U.S. policy can simultaneously mend fences with key European allies, enhance gas supply security in Central and Eastern Europe and help persuade European countries to participate more actively in a global coalition of democracies. 

Anna Mikulska is a nonresident fellow for the Center for Energy Studies at Rice University’s Baker Institute for Public Policy & senior fellow at the Kleinman Center for Energy Policy and Foreign Policy Research Institute.

Gabriel Collins is the Baker Botts Fellow in Energy & Environmental Regulatory Affairs at Rice University’s Baker Institute.